The domestic banking sector looks set to stage a rebound next year after logging a plunge in lending margins due to funding difficulty and competition in the first half of this year.

There are growing expectations that a rise in policy rates will lift lenders' interest margins further, with provisioning costs seen peaking this year as the economy has been in recovery.

Shinhan, in which France's BNP Paribas held a 8 percentstake as of end-June, earned 491.3 billion won ($417.2 million) in the quarter ended September, against 323.3 billion won a year ago and 439.7 billion won in the second quarter.

The results topped an average forecast by analysts for 372.1 billion won, according to Thomson Reuters.

Its net interest margin (NIM), a key profitability measure, increased by 28 basis points to 3.05 percent from the second quarter, as it replaced high-yielding deposits maturing in the third quarter with lower-cost products.

Provisioning costs against problem loans decreased to 157.1 billion won, versus 531.4 billion won in the second quarter.

Sixth-ranked Korea Exchange Bank (KEB), 51 percent owned by U.S. private equity house Lone Star, chalked up a net profit of 422 billion won, reflecting a 230 billion won tax refund and versus 150.9 billion won a year ago.

The results also beat an average forecast of a 212.8 billion won profit, with its NIM expanding by 32 basis points to 2.49 percent from the April-June quarter.

Loan loss provisioning expenses at KEB were 83.7 billion won, down 55.2 percent from the second quarter's 187.0 billion won, according to a bank statement.

Shares at Shinhan fell 2.3 percent to 44,750 won prior to the announcement, and KEB lost 3.8 percent to close at 12,800 won.